Customer Centric Corporate Social Responsibility ...

Customer Centric Corporate Social Responsibility

Mamunur Rashid East West University, Bangladesh and National University of Malaysia Email: [email protected] Hand phone: +60166915739

Draft Started: July 2009 This Draft: Oct 25, 2010

**Working paper - Comments Welcome**

Electronic copy available at: http://ssrn.com/abstract=1691563

Customer Centric Corporate Social Responsibility

Abstract This study vindicates the theoretical shift in corporate responsibility towards corporate strategy from a customer value-maximization standpoint. This paper argues that the prime responsibility of any company is to maximize economic means of corporate identity in terms of production and marketing of quality goods and services at a reasonable cost by escalating social, legal and environmental value. Since, customer is the major stakeholder for any corporation, satisfaction of the customers and their value maximization can work as the best example of social responsibility. Customer centric CSR is not only the best way to link corporate strategy to profit through social value addition but also the best medium of corporate transparency, ethics and strategic focus. The study concludes with a four-factor theoretical model for banking industry, with implications for both conventional and Islamic banks, in which customer centric CSR is a function of innovation and quality, social relations, operational ethics, and compliance. With further furnishing, the model can be applied to non-banking industries as well. Keywords: Customer Centrism, Corporate Social Responsibility, Business Ethics JEL Classification: M14, M31, N20

Electronic copy available at: http://ssrn.com/abstract=1691563

SECTION ONE INTRODUCTION A major portion of corporate decisions now-a-day are customer centric since customer is the center point of all corporate strategies (Porter & Kramer 2002; Kotler & Lee 2005; Lee 2008) and, especially in banks, customer stay in the center surrounded by other stakeholders (Luo & Bhattacharya 2006; Sen, Bhattacharya & Korshun 2006). Customer centric corporate social responsibility (thereinafter customer centric CSR) is the result of the gradual movement in CSR theories from a wider ethical and philanthropic level towards a more organizational stakeholder level (Lee 2008; Garriga & Mele 2004). In banking industry, alongside the possible convergence of the stakeholder theory, theory of sustainable advantage and theory of competitive advantage; customer centric CSR will generate more success since in banks customers’ contribution is the highest in balance sheet and income statement than any other stakeholders (Simpson & Kohers 2002; Garriga & Mele 2004). Customer centric CSR can reduce the ongoing CSR measurement problem (Schwartz & Carroll 2003; Lee 2008; Simpson & Kohers 2002; Vilanova et al. 2009) and can strengthen the “ability” of banks to “respond” to the stakeholders more proactively and cohesively having positive impact on the bottom line (McDonald and Thiele 2008; Orlitzky, Schmidt & Rynes 2003; Kotler & Lee 2005). Carroll (1979) started more of a corporate level of CSR keeping economical responsibility at the center, which means producing and distributing goods in a legally complied way to maximize the wealth of the company keeping the customer in the center point of corporate marketing and production strategy (Kotler & Lee, 2005). Various strategic management gurus such as Philip Kotler, Nancy Lee, Michael E. Porter, Moss Kanter, and Kaplan have tried to establish the importance of CSR from a central corporate strategic view point, which is triggering towards customers (Lee 2008). Though, none of the past CSR studies particularly concentrated on customer-centric CSR, however, they made it clear that CSR cannot be merely in the form of charity and donations; CSR has to be strategic so that it maximizes the value of the stakeholders and also contribute to the wider community (Porter & Kramer 2002). Except for the theoretical development, most of the past literatures could not successfully rationalize the strategic motivation for CSR (Smith 2003; Stewart 2006). Moreover, the inclusion of multiple stakeholders in one model evidenced inconclusive link between corporate CSR initiative and corporate financial performance (Vilanova, Lozano & Arenas 2009; Brown & Dacin 1997; Thornhill 2007). Since, a company with better customer satisfaction means they have better legal and ethical compliance (McDonald and Thiele 2008; Luo & Bhattacharya 2006; Schuler & Cording 2006), and also better corporate performance (Luo & Bhattacharya 2006); therefore, the best approachable link between CSR and coroprate financial performance must be cusotmer centic rather than multiple stakeholder based CSR. The study is still at the conceptualizing stage since the dimensions and thematic meaning of customer centric CSR are yet to take its full shape. It primarily seeks to examine the relationship between Customer Centric CSR and Corporate Financial Performance for

banks; however, as we will see later, the customer centric CSR concept is industry and size free, meaning that it is not affected by the type of industry (financial and non-financial), and also size of the company (small or big). Study on Customer Centric CSR has been largely absent in extant literatures. Therefore, this study introduces a new standard comprising of Customer Centric CSR principles. These principles are put forward by focusing on the development of the internal capacity of the banks to serve the stakeholders. Customer stays at the center of corporate strategy from marketing and production (Schuler & Cording 2006), financial (Miller and Modigliani, 1961) and even religious standpoints (Brammer, Williams & Zinkin 2007; Quran 7:85, 4:2, 5:90, 3:180; Mark 10:17-27, 12:1317), and determines the financial performance of the company (Luo & Bhattacharya 2006). Therefore, Customer Centric CSR is the evocative antecedent of Corporate Financial Performance. Under the broad paradigm of relationship marketing, stakeholder theory and theory of competitive advantage; the following assumptions are prerequisites for an effective customer centric CSR policy: a. Profit and principles are not mutually exclusive. The best way of earning profit is through establishing and following the correct standard of ethical, legal and social framework; those are in line with satisfying relevant stakeholder(s). The company needs to be customer centric, because profit is connected to principles. Few related discussions came out recently regarding fair product and social entrepreneurship. About the former, a company cannot be customer centric unless it restructures its product, branding and management policies to produce fair products, which is fair for customer, and fair for environment. The concept of social entrepreneurship is still in debating stage, which encapsulates doing business in a cost effective, and environmentally friendly way. These concepts are still highly customer centric. b. There has to be one central stakeholder, since targeting the satisfaction of multiple stakeholders will result in loss of corporate strategic focus and dissatisfaction. However, the selection of the central stakeholder, which depends on industry characteristics, is crucial with a view that the satisfaction of the central stakeholder should also satisfy other stakeholders. In most of the cases, customer is the central stakeholder and they are the major citizens of the society. Therefore, responsibility, which is customer centric, would be close to satisfying the overall social demand. This part of the theory is, hereby, named as central stakeholder theory. Among many, the major benefits of central stakeholder theory include reduction of agency problem, strategic focus and better accountability (needs further study). For example, customers are probably the best regulators of corporate activities, and satisfaction of their needs would definitely ensure transparency of corporate profitability and sustainability. c. Similar to Carroll (1979), economic responsibility is the first and foremost responsibility of the corporations. Corporations are not responsible for billion other social problems. However, corporations are made responsible for non-economic social problems, as because (1) they are social institutions, and (2) their actions and strategies have been causing the society the tribulations that we see through environment and social destructions. Nonetheless, customer centric CSR theory

assumes that engaging the corporations in something that they are not expert of, (such as what the corporations are doing through donations and charity) would deteriorate social condition. This part is supported by many evidences that show that even increase in investment in CSR does not bring any change in the perception of the stakeholders about the corporate actions and outcomes. Moreover, putting charity and donations in corporate strategy will force some companies bypassing their nominal responsibility, and fulfilling that responsibility through marketing of charity and donations. Another point is that, charity and donations create bigotry between the contribution of large and small companies. The small companies are not capable of distributing large amount of charity even though their contribution is much larger compared to that of the large corporations in many countries (such as Malaysia, where contribution of SME manufacturing output is more than 90 percent). Therefore, at this point, customer centric CSR theory proposes that charity and donations are not corporate responsibility. These are merely corporate initiatives. The best form of corporate responsibility is to serve the customer in an ethical, legal and social way. This study incorporates the value of these financial, marketing and religious critical views for banking industry to strengthen the customer centrism in CSR, so that the ultimate banking strategy becomes significantly customer driven ethically, legally and widely socially. The broad research premise of this study is that there exists a positive relationship between Customer Centric Corporate Social Responsibility and Corporate Financial Performance for Banks.

SECTION TWO RATIONALE BEHIND CUSTOMER CENTRIC CSR Beside the long expected economical motives, corporations are social institutions since they take inputs from, process it for and deliver outputs to societal value addition (Bowen 1953, Davis 1960). Over the last few decades, after industrial revolution, increases in corporate density in social processes, in the form of diversification, globalization, economies of scale and scope, mergers and acquisitions, and strategic alliances, amplify expectations from the society in terms of Corporate Social Responsibility (CSR) to fulfill basic social needs, to enhance quality of life, and to address various social problems including poverty alleviation and basic education for poor (CED1971; Holmes 1976). Corporations have also found CSR strategically important since various studies across industries find positive relationship between corporate social initiative and corporate financial performance (Smith 2003: 52; Luo & Bhattacharya 2006); however, a major portion of the studies either do not support this link or provide inconclusive link mainly due to CSR measurement problems (Carroll 2000; Griffin & Mahon 1997; Simpson & Kohers 2002). In line with the drift in the CSR theories from widely ethical paradigm to a more concrete corporate perspective, the strategic motivation for CSR has been driven by the increasing stakeholders’ expectation to proactively serving economical, environmental and legal demands (Carroll 1979; Siegel & Vitaliano 2007). As a result, the social role of business has been approached by different theorists from various angles (Vilanova et al. 2008), such as the social performance (Carroll 1979), business ethics (Solomon 1993), social contract (Donaldson & Dunfee 2002), stakeholder management (Freeman 1984), corporate citizenship (Waddock 2000) or bottom of the pyramid (Prahalad & Hammond 2002). Apart from the difficulties of scope and meaning (Shahin & Zairi 2000), CSR conceptualization over the years has changed due to high cost associated with social-business concept (McWilliams & Siegel 2001), and pessimistic behavior and lack of social skill of the managers (Lee 2008). Therefore, corporations have been looking for a clear direction on CSR, which will not only be helping them to be profitable but will also be assisting in developing competitive and sustainable customer satisfaction embedded right in the strategy. This has driven the companies into more recent concept of “strategic CSR” (Baron 2001; Bagnoli & Watts 2003), which signifies the importance of customer centric CSR. Charity and donations cannot be “responsibility” nor can be primary strategy of any corporation (Schwartz & Carroll 2003); rather these are social initiatives taken by corporations to prove their presence in social causes. Making charity and donations a “corporate responsibility” in any form; either in scholarship, donations to medical research or similar issues, will bring about the discrimination between small and large companies (Luo & Bhattacharya 2006), while the large companies have ability to donate more. Therefore, theorists argue that “responsibility” should start right inside the corporate vision, to proactively benefit the stakeholders, as core business principles in order to improve competitive advantage, which eventually result in higher profitability (Meyer & Rowan 1977; Vogel 2005; Muirhead, Bennett & Berenbeim 2002). If responsibility can be loosely defined as the “ability” of the businesses to proactively “respond” to the demand of

the stakeholders (Siegel & Vitaliano 2007; Baron 2001), the best example of CSR would be to produce and sell products and services legally and ethically by offering innovation and high quality to millions of users at reasonable price keeping the environment safe. This is the approach of Customer Centric CSR and this approach will help in diversifying the cost of CSR into various corporate processes (Castka et al. 2004), will keep the meaning and scope of CSR constant across the industry and managers will accept this since customer is the central stakeholder for any company (Freeman 1984:46). Instrumental stakeholder theory envisions the central issue of business to be surviving in the competitive market place by offering innovative products that adds value to social life in a sustainable manner (Jones 1995), which shares the common goal with theory of competitive advantage and sustainable advantage. Therefore, to keep the corporate strategy “socio-economic”, company must provide the employees with good working environment, training and pay package so that they can innovate quality products, ostracizing the use of child labor and toxic chemicals in raw materials from production processes that may be of displeasure to the users, better recycling of the products, paying suppliers on time, letting the customers know exactly what they are using (informational contents); which will eventually earn better profit for the owners. This way company can look at different stakeholders from a customer point of view and can rightly place the CSR function easily in the corporate strategy. Customer Centric CSR makes the CSR measurement easier since it evolves with the strategy towards single stakeholder, customer, keeping in mind the role of the business towards other stakeholders. This process converts CSR expenses into investments to gain competitiveness and reputation in a sustainable manner for better profitability. Exhibit 2.1: CSR Measurement tools and Corporate Financial Performance Most Innovative Companies (Business Week 2007)

Highest Brand Equity (Business Week 2007)

Most Accountable companies (Fortune 2007)

Apple

Coca-Cola

BP

Google Toyota General Electric Microsoft Procter & Gamble 3M Walt Disney IBM Sony

Microsoft IBM General Electric Nokia Toyota Intel McDonald’s Disney Mercedes-Benz

Barclays ENI HSBC Vodafone Shell Peugeot HBOS Chevron DaimlerChrysler

Reputation ranking (Reputation Institute 2005) Johnson & Johnson Coca-Cola Google UPS 3M Sony Microsoft General Mills Fedex Intel

Sales (Forbes 2007)

Market Value (Forbes 2007)

Wal Mart

Exxon Mobil

Exxon Mobil Shell BP General Motors DaimlerChrysler Chevron Toyota Total Coneco Philips

General Electric Microsoft Citigroup AT&T Bank of America Toyota Gazprom Petrochina Shell

Source: Vilanova et al. 2009 Finally, the existing CSR measurement tools do not show a proper match with the market value and sales of corporations. As shown by Exhibit 2.1, the most innovative company should have been the most reputed company with highest brand equity and largest market value. However, due to mismatch of measurement tools, the company highly accountable to stakeholders does not actually top the list of other sustainability measurement tools, which is negative in relation to basic CSR norms. Multifaceted organizational motives are partly

responsible for this mismatch. Consider an example where a company is making all strategies to satisfy customer but actually maximizing the value of the shareholders and is eventually accountable to regulators. Three different strategic stages (satisfaction of customer, regulators and shareholders) diminish the ultimate adoption of strategic focus, which could have been easily achievable by making all the strategy for customer satisfaction to maximize the value of the customers and ultimately being accountable to the customers. Customer Centric CSR makes the customer the market monitor, which provides an unbiased estimate of demand and supply balance by providing best market orientation for the firms to achieve competitive advantage in today’s marketplace (Porter & Kramer 2002; Kotler & Lee 2005).

SECTION THREE CUSTOMER CENTRIC CSR AND CORPORATE FINANCIAL PERFORMANCE Better management of firms compels integration of social and economical viewpoint of corporate activity by engaging internal and external stakeholders in the business agenda (Kaplan & Norton 1992; Porter & Kramer 2002; Rochlin, Witter, Mirvis, Jordan & Beevas 2004). Therefore, corporations should strategically relate CSR expenditure with business focus since this is the way to open up new market, investing in innovation, widening valuable social relationship, which eventually can develop firm’s reputation (Kanter 1999; Porter & Kramer 2002; Hart 1997). Considering the shifts in institutional and social expectation of business strategy, modern theme of CSR links corporate financial performance through customer centric dimensions, such as quality of output, customer satisfaction, retention, employee turnover, R&D productivity, market growth and environmental competiveness (Brancato 1995). As a result, CSR is no longer the responsibility of the corporate managers towards common good, but it is taken seriously as the strategic embracement with activity in terms of sustainably serving the customers to earn better and stable bottom-line in competitive market place (McWilliams, Siegel & Wright 2006). Link between CSR and CFP can be better explained if it is coupled with customer centrism, which has been explained from various angles; such as environmental safety of customers (Guggenheim 2006), social empowerment of the customers (Gray 2000), reduction of nonmarket risk (Lee 2008); direct financial benefits (Rochlin et al. 2004), better capital market response (Richardson et al. 1999), positive consumer purchasing behavior (Schuler & Cording 2006), increase in reputation and loyalty (Kanter 1999), attracting good employees (Turban & Greening 1997), and developing new markets (Hart 1997). Despite of the strategic CSR focus, the link between Customer Centric CSR and CFP has not been tested and therefore the measurement of dimensions of Customer Centric CSR and CFP are still unknown. Moreover, the existing CSR measurement standards (See Box 2.1) want the corporations to solve all the social problems available on earth, which has made social responsibility more towards charity and donations rather than developing corporate ability to proactively serve the stakeholders. Studies done by McDonald & Thiele (2007) and Lue & Bhattacharya (2006) explore the relationship between CSR and CFP through customer satisfaction; however, Customer Centric CSR is still unmeasured. Luo and Bhattacharya (2006) study the impact of customer satisfaction on market value resulted from Corporate Social Responsibility. Their study shows that customer satisfaction partially mediates the relationship between CSR and firm market value but only after moderated by corporate abilities (innovativeness and product quality). Though the study did not show determinants of Customer Centrism in CSR but surely can be taken as one benchmark for studying the relationship between corporate strategy and CSR from the customer’s perspective. Another way to look at the Customer Centric CSR-CFP link is from the recent evidences on CSR having impact on customer-related outcomes such as consumer product responses (Brown & Dacin 1997), brand preference (Sen & Bhattacharya 2001), and positive consumer purchasing behavior (Schuler and Cording 2006). However, Chih, Chih & Chen (2007), Simpson & Kohers (2002) and Matten & Moon

(2008) reveal factors controlling CSR-CFP link. These factors are competitive environment, past financial history of the firm, legal framework of the country and proactive-Vsregulated CSR practice. Evidences show that considering extensive charity in the corporate strategy as “responsibility” and moving away from improving product quality negatively affect corporate financial performance (McGuire, Sundgren & Schneeweis 1988). Change in Corporate Financial Performance is contributed largely by changes in customer satisfaction regarding the company (Anderson, Fornell & Mazvancheryl 2004; Fornell, Mithas, Morgeson & Krishnan 2006), meaning that customer is the primary stakeholder as far as corporate financial performance is concern. Therefore, to have an impact, either positive or negative, on the corporate financial performance, CSR has to be customer centric. To support this view further, there are evidences showing that corporations without necessary corporate abilities (better product quality and innovativeness) to serve the customer better are affected financially negatively by the increase of CSR expenditures (Luo and Bhattacharya 2006). Therefore, it is clear from the empirical evidences that to have a positive growth in financial performance, corporations should contribute to employee, shareholders, suppliers and environment from the customers’ point of view. However, Pomering & Dolnicar (2006) argue that strategic CSR may dilute the wisdom of CSR. They examine the opening of a new branches and appointing new employees only from the perspective of being too much customer-centric, however, they have missed the point that opening new branches results in giving new jobs to people, changing lives through new loans and deposits in that area. This is how a bank can contribute to society in a Customer Centric way.

SECTION FOUR CSR-CFP LINK IN BANKS Most of the studies linking CSR and CFP are conducted on non-financial firms and none of them considered Customer Centric CSR as a direct antecedent of CFP, definitely with exception to McDonald & Thiele (2007) and Luo & Bhattacharya (2006) studies; where they show relationship between customer satisfaction and CFP. However, Customer Centrism is missing in Luo and Bhattacharya (2006) and the same is differently proposed in McDonald & Thiele (2007). The motivation for narrowing the scope of Customer Centric CSR in banking industry is coming from three sources: firstly: it will give good starter in terms of methodological ease (Griffin & Mahon 1997; Rowley & Berman 2000; Carroll 2000), secondly, uniqueness of the industry is very important to link CSR with CFP (Simpson & Kohers; 2002), and lastly; banking industry is more customer centric (McDonald & Thiele 2007). Since, the empirical evidences show a largely inconclusive link between CSR and CFP (Margolis & Walsh 2001; 2003), mainly due to measurement errors, model misspecification and insufficient scope of the data set (Igalens & Gond 2005; Griffin & Mahon 1997), narrowing down the study to banking industry will be a good approach (Simpson & Kohers 2002). With the increase of CSR initiative in banking industry, larger evidences are showing negative relationship between CSR and CFP in banking (Australian Consumer Association 2005; Thornhill 2007). Banking is a competitive industry with direct interaction with various customers every day. The reason for which customer switch banks is that they are not satisfied with banking services (Manrai & Manrai 2007:209), not because the bank did not provide large amount of charity. CSR researches in banking explore the relationship between banks’ involvement in social programs, such as employee training, investing in socially responsible projects, socially responsible deposit programs, with the behavior of the customers and find positive impact (Lemke 1987; Brown & Dacin 1997). Murray and Vogel (1997) extended these social causes to employee retention, cause-promotion, community development investment programs, better customer service, use of updated technology in banking. Any modern active bank tries to put these things in their strategy to serve the customer better than their competitors. Simpson & Kohers (2002) use Community Reinvestment Act (CRA) Ratings and financial performance of banks and find significant positive relationship. However, CRA ratings only consider the credit discrimination (asset side of bank) made by commercial bank leaving the liability side (deposit side of bank) uncovered. Most of the indices that are used currently to measure CSR, such as the KLD index, Fortune Reputation Survey, Domini 400 Social Index, EPA Toxic Release Inventory and 500 Directory of Corporate Philanthropy, are biased to be widespread leaving less attention to specific industry (Griffin & Mahon 1997; Brown & Perry 1995; Simpson & Kohers 2002). For example, banking industry is more customer centric, it cannot pollute the environment, the labor laws are very much standardized and various operational measures are regulated by central banks and international banking community (Simpson & Kohers 2002), therefore, thesethe existing CSR standards cannot be directly used in banking industry and the only way bank can render flexible social role is developing its inside capacity to serve customer (McDonald &

Thiele 2007). These gaps raise the demand for new CSR standard that will measure Customer Centric CSR in Banking Industry by including both deposit and loan customers. The view of Customer Centrism in Banking has changed over the years. Nwankwo (1991:26) argues the importance of multiple stakeholders that bank has responsibility towards owners for chartering the bank, towards depositors for the deposit, towards borrowers for the profit, towards regulators for guidelines and towards community as it supports the banking operation. However, Narwal (2007) considers 33 banks in India to test their CSR initiatives and finds that banks mostly consider CSR initiative to foster customer satisfaction. As similar to Chih et al. (2007), Achua (2008) studies Nigerian Banks and finds influence of regulation on CSR application. Achua (2008) argues that banks should practice better self-regulation to proactively include CSR in banking strategy. Researches on linking CSR and CFP are still in embryonic stage; therefore, comparison of CSR-CFP link between Islamic and non-Islamic banks is in deficit. The traditional, nonstrategic CSR definition is partly responsible for this, meaning that there cannot be any difference between CSR of Islamic and non-Islamic banks if the CSR is defined based on donation, charity, but not from the view of competitiveness and sustainability.

SECTION FIVE CONCEPTUAL MODEL Integrating CSR for multiple stakeholders’ satisfaction will be a difficult task (Carroll 2000), which has been mostly responsible for the ongoing CSR measurement problem (Griffin & Mahon 1997). However, customer-centric CSR initiative should lead to various strategic benefits to a bank; firstly, measuring CSR will be easier; and secondly, corporate financial performance will be better through higher customer satisfaction and involvement of other stakeholders. Like other CSR indices, measuring Customer Centric CSR can be conducted using a content-analysis-based study. This study preliminarily assumes that companies are bound by regulation to give all the information prescribed by Customer Centric CSR principles using a “Customer Centric disclosure method” applicable to respective customers. This study suggests using “product labeling and/or brochures, corporate charter published in branches”, instead of annual reports, as medium of CSR disclosure. Who are the important stakeholders that Customer Centric CSR must consider? There are six major stakeholders identified for any corporations; they are customers, employees, owners, suppliers, regulator, and the community (Griffin & Mahon 1997; McDonald & Thiele 2007). Out of these six, for banks, customers and suppliers are the same deposit and loan customers, and these loan and deposit customers represent large part of the community (McDonald & Thiele 2007). Therefore, banks are rest with four stakeholders; customers, employees, owners and regulator. What are the requirements of customers, employees, regulators and owners that represent economical, ethical and legal responsibility of the company (see Exhibit 2.2)? The beauty of owners and regulators as stakeholders is that their expectations depend on the success and failure of the company operation. Owners decide on investing in any company based on its future prospects Miller & Modigliani (1961). Therefore, it is expected that owners will be happy with the company operation as long as the customers and the employees are happy. Central bank, regulators for banks, will be happy if the interests of the depositors (customers) are satisfied. Finally, banks are rest of two active stakeholders, customers and employees, where employees work for betterment of customer satisfaction. Banks must design their internal process such a way that provides best convenience and saves valuable time and cost of the customers (McDonald & Thiele 2007). Apart from developing innovative and structurally sound internal system based on cutting edge ebanking facilities, banks must foster the engagement of qualified and diversified employees into developing innovative, needy and financially sound projects for banks (Bhattacharya and Sen 2004). Banks must ensure equitable distribution of their branches both in the rural and urban areas to cater to the needs of the needy people, especially to help the government in their policy role regarding development of Small and Medium level enterprises (Kotler & Lee 2005; Bhattacharya & Sen 2004; Asyraf Wajdi Dusuki & Nurdianawati Irwani Abdullah 2006). Most importantly, banks should not engage into deposit or loan relationship with any company that environmentally irresponsible, uses child labor and toxic materials in the production process (Kotler & Lee 2005; Bhattacharya and Sen 2004; Manrai & Manrai 2007). Bank is responsible to train its employees and

customers to share effective information regarding risky investment and community development program (Manrai & Manrai 2007). Exhibit 2.2: Principles of Customer Centric CSR (Clustered under Four Constructs) Quality and Innovation 1. Faster internal processing eliminating bribery and corruption 2. Bank promises productive R&D to foster innovative services 3. Provider of training to foster innovation, supply driven policy 4. Provide competitive salary and benefit packages to attract qualified employees Operational Ethics 5. Bank does not have deposit or loan relationship with any company that is harmful to environment. 6. Bank does not have deposit or loan relationship with any company that employs child labor. 7. Bank does not engage in excessive risky activity (risky deposits or loans). 8. Bank reinvests profits in innovation and ethical projects Social Contribution 9. Bank has branches in both rural and urban areas. 10. Bank organizes customer teaching programs on its services 11. Bank is equal service provider based on merit by eliminating forced labor. 12. Bank provides employee union Facility 13. Bank shares the economic policy role with the government for specific sector development Compliance 14. Bank ensures legal conformity of operation that affects customers (including Shariah rules) 15. Bank ensures prescribed corporate governance practices for effective service to customers

Exhibit 2.3: Proposed Conceptual Model

Banks are internationally regulated institutions and therefore, they are responsible to follow capital-risk guidelines by Bank for International Settlement, corporate governance regulation by respective local government and some labor laws by ILO. Compliance to these laws mostly represents banks’ willingness to operate in a sustainable manner by eliminating risky operational contents that saves the interest of the depositors and borrowers (Chakrabarty 2006). Moreover, banks will follow these regulations not because they are regulated, but because the customers want the banks to ensure their safety (Bhattacharya & Sen 2004). Finally, banks are expected to ensure a proper corporate culture that comprises of recruitment of qualified employees, reinvestment of profit in ethical investment ensuring better profitability to owners and banks will ensure proper dissemination of relevant information through accessible sources to customers (Manrai & Manrai 2007). Fifteen Customer Centric CSR principles are proposed having an alignment with frequently practiced CSR standards such as UN Global Compact, Triple Bottom Line and Social Accountability International Standards. Corporate Financial Performance should also be measured in a customer centric way. This study suggests a mixture of traditional and non-traditional measures of Corporate Financial Performance. In the traditional measures, ROA is good measurement, where ROA will provide the comprehensive business profitability (Rashid & Nishat 2009). Under nontraditional measurement, this study is planning to use growth of deposit, loans, ratio of R&D to net profit, ratio of growth of turnover to growth of operating cost and plough-back ratio. If the CSR is coupled with strategy and corporate leader consider CSR as an investment to develop internal capacity for the service of the society; then there is good reason to believe that Customer Centric CSR will have tighter coupling with Corporate Financial Performance. The conceptual model is depicted in Exhibit 2.3. Due to the separation of social and economical role of banks; except for the differences in Shariah, CSR practices in Islamic and non-Islamic banks have been carried out in similar fashion. CSR studies in Islam are done mostly in two areas; firstly, on the applicability of Islamic Shariah in CSR conceptualization (Asyraf Wajdi Dusuki 2008; Wilson 2002; Chamhuri & Hossain 2009; Williams & Zinkin 2009; Sadeghzadeh 1995) and Secondly, from a disclosure point of view in Islamic banks (Farook & Lanis 2005; Farook 2008; Usmani 2002; Maali, Casson & Napier 2003; Karim 1995; Lewis 2001; Archer, Karim & AlDeehani 1998; Haniffa & Hudaib 2007). Apart from the ethical importance of CSR in Islamic banks (Anas & Mounira 2009; Wilson 2002; Farook & Lanis 2005), various studies done on customer satisfaction in Islamic banks find faster and efficient counter service, cost-benefit trade off, efficiency of the employee and wide range and quality of the services as significant factors (Haron, Ahmad & Planisek 1994; Kader 1993; Metawa & Almossawi 1998; Abbas, Hamid, Joher & Ismail 2003). Islamic banks work as the representative of their partners/clients/customers as the capital sharer (Farooq 2007). Moreover, responsibility in Islam goes hand in hand with

trust (Asyraf Wajdi Dusuki 2008). Therefore, financial performance of Islamic banks will mostly be affected by its ability and willingness to serve the customers in Islamic banking transaction. Islamic banking is more close to Customer Centrism compared to the counterparts by the virtue of effective profit-and-loss-sharing (PLS), which is the basis of establishing human rights and poverty reduction (Farooq 2007). Allah (SWT) has made trade halal, but this trade should be free of Riba (interest), Mysir (speculation and gambling), Gharar (uncertainty and inaccurate information) and illegal product such as alcohol (Al Quran 2:275-276, 278-279; 3:130; 30:39). As Islamic Shariah principles are embedded in Islamic business principles (Usmani 2002; Asyraf Wajdi Dusuki 2008); therefore, CSR in Islam should be Customer Centric. Islamic business principles, with very few exceptions, go far beyond the 10 UN Global Compact CSR principles, especially in terms of clearly codifying the ethical standards along with the enforcement mechanisms (Williams & Zinkin 2009). However, the actual CSR disclosure by Islamic banks is far below the expected level (Farook & Lanis 2005; Wilson 2002). The reason could be that, as opposed to Islamic business principles, the traditional practice of CSR disclosure is not customer centric. The corroboration is evident by the recent AAOIFI (2008) “prescribed” CSR standards for Islamic banks. The new standard makes Customer Centric bank internal development issues, such as customer screening, customer service and policy on expenditure and income on customer accounts, mandatory in CSR disclosure.

SECTION SIX CONCLUDING SUMMARY Customer Centric CSR is about satisfying all the relevant stakeholders from the customer point of view. This is the way the company fulfills its regular operational commitment to society. Is Customer Centric CSR selfish or narrow minded (Pomering & Dolnicar 2006), meaning that, do customers consider their own interest before the interest of the society? if bank customers want ATM connectivity, faster internal processing, higher return and lower fees and better branch environment; are the customers becoming selfish or they are opening new opportunities for e-banking activity in the community, opportunity for employee training on how to deal with customers in a better way and how to manage the firm efficiently. These things add value to socio-economic relationship of the bank with the society. On the other hand, customers are the major stakeholder of any firm, irrespective of the size and type of the firm. As a result, major corporate decisions and strategies are directed towards achieving customer centric outcomes (Griffin & Mahon 1997). Therefore, it is easy to look at everything a bank does from a customer point of view, which gives the bank a better strategic focus, trust, better profitability and integrated social development. Researchers may find ‘consumer centric’ CSR narrow minded, since evidences have showed non-consumer routes to link CSR and CFP. Kotler & Lee (2004); Margolis & Walsh (2003) show that CSR affect CFP from multiple stakeholders’ integrated activity such as employee, owners, customers and community. However, the silver lining is that these studies have also argued that interest of the stakeholders are preserved when company invest in employee productivity, training, and internally company does really a good job in restoring the competitiveness and sustainability of the good corporate decisions. This aspect is especially important the way it sets the path for developing the interest of the multiple stakeholders from the customer point of view. So, customers can never be selfish and therefore, Customer Centric CSR cannot be ‘narrow’ minded. Customer is the reality every banker has to face every day. Finally, success of Customer Centric CSR also largely depends on how information on CSR is disseminated to the consumers (Fornell 1992). Markets with inferior quality of information to customers ended up with large market imperfections (Anderson et al. 2004) such as syndication and lack of customer rights. Therefore, regulators have to prepare an adjustable environment for banks to be more Customer Centric and to contribute more to the socio-economic development of the country.

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Box 2.1. CSR Standards Dow Jones Sustainability Index The Dow Jones Sustainability Index comprises the companies with the best CSR practices in their respective industries. The evaluation is based on the cooperation of Dow Jones Indexes, STOXX Limited and SAM. FTSE4Good The FTSE4Good Index Series measures the performance of companies that meet globally recognized CSR standards; it is managed by the FTSE4Good Policy Committee, an independent body of CSR experts from academia, fund management and business. Global 100 The Global 100 is a list of ‘‘The Global 100 Most Sustainable Corporations in the World’’ which is announced annually at the World Economic Forum in Davos. The list is developed by the Canadian magazine ‘‘Corporate Knights’’ in cooperation with Innovest Strategic Value Advisors, a leading research firm specializing in triple bottom-line analysis and socially responsible investments. UN Global Compact The UN Global Compact is a multi-stakeholder initiative seeking to advance 10 fundamental principles in the areas of human rights, labor, the environment and anti-corruption. It is a direct initiative of the UN Secretary-General; the network consists of a large number of companies, as well as NGOs, academia, UN bodies and labor unions. The initiative is voluntary; there are few specific requirements for membership. World Business Council for Sustainable Development (WBCSD) The WBCSD is a CEO-led coalition of 180 companies working towards sustainable development. The WBCSD is active in policy development, advocacy work and in developing best practice business leadership in CSR. Membership is by invitation only and requires extensive investments in terms of time and resources. The Global Reporting Initiative (GRI) GRI is a reporting standard for triple bottom-line reporting. It is developed through a multistakeholder process, led by the GRI secretariat. It is important to note that their database is based on self-reporting; therefore, the companies listed do not necessarily report in compliance with the GRI reporting standard. KMPG International Survey of CSR Reporting The KMPG Survey is the most comprehensive of its kind, based on a survey of CSR reporting practices in the 100 largest companies in each of the 16 countries in the survey. The methodology covers triple bottom-line issues, and is carried out by KPMG in each country. SustainAbility’s list of the 100 best sustainability reports SustainAbility is a leading think tank which provides a biannual evaluation of best practice sustainability reports. The reports are ranked on a number of indicators, culminating in a list of the 100 best reports worldwide. The reports are submitted by the companies themselves for evaluation by SustainAbility. ISO 14001 ISO 14001 is an environmental management certification standard created by the International Standardization Organization (ISO). It is a generic management tool, applicable to all companies. The standard covers policy development, planning, implementation, monitoring and review. Certification is issued by a third party certification body. Source: Gjolberg (2009)